Individual Taxpayers Rush to Reap Tax Savings

When New Yorkers do their tax returns this year, many could be in for some welcome news. Under President-elect Donald Trump’s proposals, many individuals may potentially see lower taxes.

“In what looks like the stars and moon aligning, it looks like we’re going to get tax reform,” said Kate Barton, vice chair of tax at EY Americas.

Accountants across the New York City metropolitan area are preparing their clients to make the most of current tax policy with smart year-end tax moves—and to stay abreast of changes that could be coming in 2017. Trump will need the support of Congress to move forward on his ideas. “We continue to look at the House Republican blueprint of what may happen in 2017,” said Barton.

Here are some of the most important changes that may affect individuals.

Reduction of the number of tax brackets from three to seven: Many New Yorkers have incomes that might sound large to people living in lower-cost cities but they also contend with a cost of living that is nearly the highest in the country.

Trump’s tax plan, if it is passed, could lower the sting of high-income taxes. The three tax brackets that would exist for married joint filers would be 12% (for those earning less than $75,000), 25% (for those earning more than $75,000 but less than $225,000) and 33%, for those earning more than $225,000: 33%. For single filers, brackets would be half these amounts.

The seven current tax brackets range from 10% for married joint filers with incomes up to $18,450, to 39.6% for married joint filers with incomes of $464,851 or more.

Given that taxes will likely be lower next year, many accountants are encouraging taxpayers in most brackets to defer income into next year if they can.

However, some taxpayers will have to brace for a higher rate, notes CPA Jonah Gruda, a tax partner at WeiserMazars. Some on the lower end of the income spectrum will pay a greater percentage of their income in taxes. “We’ll potentially see folks in the 10% bracket now, in 12%,” said Gruda.

Caps on deductions: Trump has proposed capping itemized deductions at $200,000 for married joint filers, and $100,000 for single filers. That means people who pay a lot of property taxes may not be able to deduct them all. The same holds true for those who take charitable deductions.

“The people who benefit from itemized deductions tend to be in the higher-tax-paying states such as New York, New Jersey or California,” said Craig Savell, an accounting and audit partner at Margolin Winer & Evens, LLP a CPA and advisory firm with offices in New York City and Garden City, Long Island. “They have significant itemized deductions.”

EY is advising clients to deduct as much as they can this year, given that tax rates may decline next year and some deductions may not be available. “We’re at an all-time high tax rate,” said Barton. “You can bet everyone is looking to accelerate deductions.”

Gruda took a call recently from a client who wanted advice on how to make several million dollars in charitable donations before the end of the year. He didn’t want to wait until next year.

Gruda thought it was a good idea to do so in 2016, when there is no limit on such deductions. “If the administration’s proposals go through, it will be hard to know if they will be retroactive to January 1, 2017,” Gruda said.

Much higher standard deductions: For single filers, the amount of income that is tax exempt will be $15,000 under Trump’s tax proposal, up from $6,300. Married joint filers will see their exemptions rise to $30,000 up from $12,600. Personal exemptions will be eliminated, and so will head-of-household filing status, according to Trump’s website.

Here again, however, there is a lot of uncertainty. “The administration has not specified the income levels where this will be applicable,” said Gruda.

Taxation of interest from carried income at ordinary investment rates: For those in New York City’s financial sector, this proposed change will be important. Investment fund managers often get paid in “carried interest”—a right to receive a certain share of the profits earned by the fund without contributing the same share of the fund’s investment capital—rather than a salary. The managers currently pay a 15% tax on most of their carried interest income, rather than at their individual tax rate.

Critics say this is essentially a tax break for the wealthy. “Carried interest is taxed at substantially lower rates than wages and other forms of compensation,” said Frank Kurre, Grant Thornton’s Metro New York and New England managing partner. Trump’s proposal would attempt to address this. “The tax rate would be the same as it is on salaries,” said Kurre. However, it is still unclear if Trump will move forward on raising the tax rate for carried interest, notes Kurre.

Simpler taxpaying: Trump has said he wants to simplify the process of paying taxes but has not provided a lot of detail. “My personal big rock that isn’t being addressed sufficiently is simplification,” said David Lifson, a CPA and partner at Crowe Horwath in Manhattan. “We’re still missing over $400 billion a year in tax collection. The government estimates that only about 84% of the tax owed is actually ever collected. Closing the tax gap by 1% increases federal tax revenues by over $25 billion per year. There are tax cheats and people who don’t pay their taxes properly because they don’t understand the law. If you made the law simpler, fewer people would get away with cheating, and more people would feel better about being tax compliant. To me, transparency in taxes is the number one thing we need.”

Clarity on issues like this isn’t likely to come before the inauguration. But many accountants expect the months immediately following it to be eventful. “I think the next 100 days are going to be really huge in terms of what proposals made during the campaign will be put into place,” said Gruda.

Crain’s New York Business is the trusted voice of the New York business community—connecting businesses across the five boroughs by providing analysis and opinion on how to navigate New York’s complex business and political landscape.